One of the most beleaguered parts of the market is growth stocks. Of course, it's a complete flip from what we experienced for much of the past decade and in the months following the pandemic.
In hindsight, it's clear that a major factor in their outperformance was the steady weakness in short and long-term rates. Today, this tailwind has turned into a brutal headwind as both short-term and longer-term rates are marching higher. Short-term rates are more reflective of Fed policy and are climbing higher. In fact, Wednesday's Federal Reserve Minutes of the December meeting was much more hawkish than expected as Committee members were in agreement that the labor market was sufficiently strong enough to justify raising rates.
Similarly, longer-term rates should expect to continue moving higher due to inflation that is in the 3 to 4% range and expectations that economic growth will continue to accelerate. At the same time, the boost in revenues from the coronavirus has subsided. Some growth stocks have maintained their positive momentum, while the vast majority are seeing a reversion to the mean.
These negatives matter more for growth stocks, because they have high multiples which means the stock has high growth expectations embedded into it, leading to more downside. If we look at the ARK Innovation ETF
Additionally, in an inflationary and accelerating growth economic environment, investors and traders have a variety of options to find stocks with earnings growth in the double-digits and at multiples in the low single-digits, so money will obviously flow into these stocks and out of stocks whose earnings prospects will be realized years in the future but are priced as if this outcome is a certainty.
